This Will Be the Next Big Oil Play
Joy Global makes mining equipment, so it's odd to hear the company talk about the prospects of an oil play. Unless, of course, that oil is in the Canadian oil sands, which are mined and not drilled. And Joy Global isn't alone in its efforts to grow in the oil sands—miner Teck Resources wants in, too.
Oil in sand
The Canadian oil sands are pretty much what they sound like, oil trapped in sand. To get at the stuff you need to dig it up, put on a truck, and then treat it (with heat and chemicals) until the oil comes out more easily. It's a fairly labor intensive and costly process. Joy Global CEO Ted Doheny pegs the cost at anywhere between $50 and $80 per barrel of oil.
That can be a high hurdle to reach, especially at the upper end of the range. However, during Joy Global's second quarter conference call Doheny noted that, "The economics of oil sands continues to improve as sustained $90 per barrel oil prices exceed the average cost of production." In fact, the mining equipment maker just got an order for a multiple shovel destined for the oil sands. It will be delivered in 2016 and should help keep the company's backlog full while mining equipment sales elsewhere continue to stall.
However, Doheny points out that this wasn't an overnight success. "We've been working this oil sands order for over five years." That said, Joy Global has done "extremely well in the oil sands" and has "very strong market share." Moreover, every new order creates the potential for service revenue and, perhaps just as important, a reason for other companies to go with Joy Global product over competitors.
And with resource industries in a general funk, being able to sell into the oil space offers valuable diversification. For example, newly proposed carbon dioxide rules for U.S. utilities could leave an important end market for Joy Global struggling for longer than hoped as the U.S. thermal coal market adjusts to a new, lower level of demand.
Another player looking at oil
This is why mining giant Teck Resources is getting into the oil sands, too. The company and its two oil-focused partners announced last year that they have decided to move ahead with the Fort Hills Oil Sands project. Teck only has a 20% share of the project with the partners pretty much splitting the rest. However, that 20% should equal 36,000 barrels per day (13 million barrels per year) of bitumen as soon as 2018. The first oil is expected to "flow" in late 2017.
This is a big number for a company that, literally, has no exposure to oil right now. Today Teck's focus is metallurgical coal (47% of 2013 profits), copper (38%), and zinc (15%). Adding oil, which has held up relatively well as other commodities have fallen sharply, will be a good diversification effort. And, unlike traditional oil plays, Teck Resources' Fort Hills project is expected to have a lifespan of as much as 50 years.
And 2017 can't come soon enough. In fact, the bright spot in the first quarter was that the price Teck Resources got for zinc was unchanged year over year. Pricing for coal and copper both fell. The coal business was particularly hard hit, with commodity price declines leading to a profit margin contraction of 20 percentage points. Copper wasn't as hard hit, but still saw a six percentage point profit margin decline.
Canadian Oil Sands to the rescue?
It would be unreasonable to suggest that growth in the Canadian oil sands will save Joy Global or Teck Resources. However, the oil sands are an important unconventional oil deposit that will become more and more valuable as oil companies find that conventional oil plays are, well, played out. That will help Joy Global continue to expand its global footprint and allow Teck Resources to venture into a new area. Watch the oil sands and think about these two companies as relatively low-risk plays on oil sands growth.
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The article This Will Be the Next Big Oil Play originally appeared on Fool.com.Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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